83845 PANEL/TRACER STUDY ON THE IMPACT OF BUSINESS FACILITATION PROCESSES ON MICROENTERPRISES AND IDENTIFICATION OF PRIORITIES FOR FUTURE BUSINESS ENABLING ENVIRONMENT PROJECTS IN LIMA, PERU Project Summary nesses did not apply for licenses, even when it became cheaper for them to do so. Further study found that while some small Many microbusinesses in Lima, Peru, operate without municipal businesses that held licenses were good performers in terms of licenses because the licensing process is lengthy and brings their incomes and profits per worker and their investments in them to the attention of tax authorities. An effort was made machinery, there was no evidence to link the act of having a to gauge whether streamlining procedures would encourage license with the stronger performance. In addition, municipal more companies to get licenses and whether that would authorities showed a lack of understanding about the potential boost economic development through production of higher- of small subsistence businesses and the need to make licensing quality goods and services. Prior efforts in Mexico to reduce procedures simpler for them, expressing doubt the businesses the number of days and requirements for obtaining a license would be able to pay a license fee in any event. Some small worked relatively well and an effort was made to repeat the businesses that were prepared to seek licenses complained that finding in Peru. municipal inspectors’ requirements were excessively rigid and What IFC expected costly. For example, the owner of an Internet booth business with eight computers was required to have a ground well to Making it easier and less time-consuming to get a license would qualify and felt that was unnecessary. allow small firms to get credit more cheaply, gain increased legal protection, and have a better chance at expanding by teaming Lesson for future operations up with bigger firms. Providing incentives for applicants could encourage more to seek licenses and potentially to increase Removing administrative barriers and lowering costs of licensing their output. for microbusinesses do not induce more to operate according to law, because many of them are subsistence operations so fragile What happened and why that they do not perceive any benefit from holding a license. Many are family-operated, see scant possibility of being able A group of 32 unlicensed microbusinesses was selected to judge to increase the size of their businesses in the near future, and why they preferred to operate informally, or without licenses. All often wish to avoid the taxation that would follow from licens- had fewer than six employees, most were led by women, and 21 were rated as precarious because they generate low income ing. Reducing costs for a license might not induce more to seek and are in a generally fragile condition. Most saw no benefit in licensing, since owners of many microbusinesses, operating in obtaining a license because of their low operating scales and a survival economy, are primarily concerned with whether the the costs of doing so. Owners of such subsistence operations business itself will survive long enough to require and benefit may not operate by normal entrepreneurial rules for a variety of from a license. A focus on social programs aimed at developing reasons, including the small scale of their operations and their work skills and improving employment opportunities for young- perception of the economic situation, and so do not make the er members of families involved in microbusinesses might help connection between investment and increased consumption these businesses acquire the skills needed to grow and enter the that might be expected. Some of them cited benefits from oper- formal economy by obtaining a municipal license. Local govern- ating informally, because the businesses thereby avoided paying ments might link actions like establishing support programs for taxes and skipped paying the costs of health and safety regu- older family members in microbusinesses by making it a condi- lations. A typical response from a microbusiness owner, operat- tion that they bring their businesses into compliance with safe- ing at subsistence level, was to question what advantage would ty and other regulations. Improving municipal services such as be gained by holding a license, since income was so low that social security and policing, and encouraging small businesses the owner would never qualify for a bank loan anyway. Even with low interest credit through the banking system or by con- when the municipal government cut the time for obtaining a ditional credits, could overcome distrust and persuade more to license to two days from 160 and reduced inspections, the busi- seek licenses and consider expanding operations. 1 Related lessons • It can be difficult to distinguish subsistence businesses from growth-oriented microbusinesses and small firms • Small business owners are more reluctant to seek licens- that might be more responsive to policies aimed at en- es, and to pay fees for them, if they perceive municipal couraging them to seek licenses. Developing measures authorities failing to supply adequate safety, sanitation. for identifying the businesses’ respective level of devel- and other services opment would help in tailoring programs that encourage • Widespread lack of knowledge about how to apply for a the more developed to seek entry into the formal econo- license implies that local governments need to publicize my through licensing. measures they are taking to make it easier to become licensed and set out the benefits that stem from licensing in order to create enthusiasm • Linking a campaign explaining how microbusiness owners can become licensed to the offer of training and other services intended to help them expand operations could offer the dual benefit of providing the training and in- creasing trust in municipal authorities About the Results Measurement Network: IFC’s Results Measurement Network is a global network of approximately 100 professional results measurement staff from Advisory and Investment Services. It covers all IFC regions, industries and Advisory business lines, in addition to staff in the Development Impact Department based in Washington DC. The Results Measurement Network seeks to improve IFC’s development impact by setting standards and ensuring consistency in results measurement. The network also works ensure that results continuously inform strategy, operations, and incentives. Contact: Acknowledgements: Alexis Diamond Oscar Antezana (IFC), Alvaro Quijandria www.ifc.org//results Results Measurement Specialist (IFC), Alexandra Santillana (IFC), Alexis adiamond@ifc.org Diamond (IFC), Andrei Mikhnev (IFC), Namita Datta (IFC), Kamal Siblini (IFC) 2